Oil, gas rebound in Cook Inlet comes at cost to state treasury

The turnaround in Cook Inlet oil and gas production in recent years is one of the big success stories for Alaska. It has come at a hefty expense, however, to the state treasury.

It turns out that inlet producers are being heavily subsidized by the state of Alaska, consultants to the state Legislature say in a report.

Since the state budget is 90 percent dependent on North Slope oil production revenues, this also means that, in effect, the big producing companies on the Slope are paying for the Cook Inlet producers.

What matters most to Alaskans is that the Cook Inlet turnaround, no matter who pays for it, has increased natural gas production in Southcentral Alaska, easing a worry that gas supplies might run short and that utilities might have to import liquefied natural gas, at great expense.

Still, the matter of who pays the bill is important with the plunge in oil prices and huge year-to-year state deficits looming.

The Legislature’s oil and gas consultants, Janak Mayer and Nikos Tsafos, said the development incentive tax credits paid to Cook Inlet producers in fiscal year 2015, the state’s current budget year, constitute about half of the state’s cash outlays to companies under the credit program, or about $300 million.

Mayer and Tsafos spoke to the Senate Finance Committee in Juneau on Jan. 27.

Statewide, the total cash outlay for the credits are $625 million, according to Department of Revenue data, which actually exceeds state petroleum tax income by $101.4 million, according to the Revenue Department figures Mayer and Tsafos presented to legislators.

The state’s total cash outlay for the tax credits are estimated at $625 million this year.

“Since the state does not levy a profit-based production tax in Cook Inlet, these (tax credits) essentially constitute a subsidy to Cook Inlet producers rather than an investment in future tax revenue (and production),” Mayer and Tsafos said in a paper prepared for the Legislature.

The state’s net profits production tax applies only to the North Slope fields. Cook Inlet fields are under a very minimal production tax. However, because Cook Inlet companies can take the same advantage of the state tax credit cash payments as do North Slope explorers, the result is a subsidy — more paid to the companies compared with production tax revenue paid.

Cook Inlet companies do pay state royalty, although with some inlet fields this is reduced, and state corporate income tax in some cases.

The state’s tax credit program also allows companies with production who pay production taxes to credit their tax credits against production tax liability. This money never shows up in the state general fund because the companies do not have to pay it, although the state tracks the amount.

A part of the tax credit program, however, also allows companies with no production tax liability, such as exploring companies who have not yet made discoveries, to turn in their credits for a cash refund from the state. This is money that must be appropriated from the state general fund because it is an actual expenditure by the state.

 

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